Want To Make Money In Marijuana? Read This First

“Investing in marijuana” used to mean fronting cash to the neighborhood dealer so he could purchase compact fluorescent lights for his hydroponic operation, then hoping he didn’t get arrested for possession with intent to distribute before he could pay you back (with interest). Today, in a political climate that’s rapidly become more tolerant of the use of Schedule I controlled substances, multiple stock exchanges carry the issues of companies whose primary business is cannabis. They range from makers of fingerprint-activated vending machines (Medbox, Inc.), to the institutional version of those hydroponic grow boxes (Terra Tech) to speculators that plan to have a line of sun creams and AIDS drugs available any day now. Honestly, they’re moments away from appearing in pharmacies everywhere, just you wait (OmniCanna Health Solutions). (For more on this topic, see: A Look At 2014's Leading Cannabis Stocks.)

Still The Wild West

Even with Colorado and Washington now allowing recreational sales – and more states sure to follow – the nascent marijuana industry isn’t what you’d call formalized nor organized. The publicly traded players are tiny, are more hopeful than established, and for the most part offer little more than blueprints in lieu of actual products and services. (Then again, you could have said the same thing about software companies in the 1970s or gold mining operations in the 1850s.)

A generation ago, urban legends abounded that the major tobacco companies were buying up cannabis fields left and right in anticipation of the drug’s eventual legalization. Like most folk wisdom, that nugget was impossible to disprove, but in today’s more accommodating environment no major corporation has yet declared itself willing to dirty its fingers with a substance that, again, the federal government never stopped declaring it illegal to manufacture, distribute, dispense or possess.

Medbox, the vending machine manufacturer, is the closest thing the marijuana industry has to a blue chip. And it’s still parsecs away from ever being listed among the Dow 30. (Aside: Marijuana tycoons, much like the most enthusiastic consumers of the drug, routinely focus on its effectiveness as a treatment or remedy. Thus the proliferation of the prefix “med-“ and its variants among marijuana company names. The thinking goes that cannabis has purposes far beyond the hedonic one of induced euphoria and is, in fact, an elixir as beneficial as and fundamentally no different than aspirin or tetracycline.)

Lots of Smoke, But No Flame Yet

Medbox stock began trading over-the-counter in the late summer of 2012, went from $4.25 to $205 to $20 in the space of a week, and has since continued to show a pattern of steadily declining prices punctuated by sporadic and ephemeral spikes. In other words, the very definition of a speculative stock—in a speculative industry. Meanwhile, the most outspoken marijuana devotees love to claim that marijuana is a $10 billion, $36 billion, even $110 billion industry. But if the fate of the publicly traded marijuana stocks is any indication, those figures are as generous as they are divergent.

The only other marijuana company with a market capitalization comparable to Medbox’s half-billion or so is CannaVest Corp., which develops shampoos, conditioners, body washes and other skin care products, not to mention protein powders and other sports nutrition offerings that are optimistically listed as “Coming Soon.” The company’s one-pint bottles of shampoo and conditioner each sell for $40, or about six times what you'd pay for Pantene or Head & Shoulders. Cannavest’s market is clearly the subgroup of people who are really, really, really sold on the idea of hemp as nature’s everlasting miracle flora, to the exclusion of making economical retail buying decisions. CannaVest also loses $1.06 for every dollar it takes in, so perhaps the company is offering $40 shampoo as a relative bargain.

Penny Stocks Mean Limited Interest

Contrast Medbox and Cannavest with mCig, Inc., whose business plan fuses two recent cultural curiosities: socially acceptable marijuana use and electronic cigarettes. While an electronic cigarette can theoretically burn any plant material – tobacco, cloves, celery – mCig offers a line of vaporizers marketed just for marijuana use. The company trades over-the-counter, hasn’t made a dime since its inception, and in fact has barely made a sale (revenue of $50,000 over the last three years.) Not coincidentally, over-the-counter and Pink Sheets stocks are the overwhelming rule, not the exception, among marijuana issues. The ones that can consistently stay at prices above $1 are extraordinarily rare, and such relatively high-priced stocks showcased in this article comprise a list that’s just about exhaustive. Furthermore, it barely counts as an observation to point out that it’s effectively impossible to build wealth among the penny stocks that trade on the outskirts of the stock market.

The very phrase “marijuana stock” is limiting, more so than “vending machine stock” or “hydroponic stock” is. Why? Because an upstart pharmaceutical company that restricts itself to making cancer and AIDS drugs exclusively out of cannabinoid derivatives is closing other avenues off to itself. It’s like a grocery that deals only in organic, fair-trade food. The methodology, the mission, and the marketing can end up overshadowing the goods or services offered. Any enterprising cancer drug manufacturer that’s willing to invest in non-hemp-related research and development has a huge competitive advantage over its more ideologically driven counterpart. There comes a point when investors and consumers have to wonder – is hemp truly an integral ingredient in this company’s protein powder, or is the hemp in there solely because the manufacturer is trying to make a point? (For more on this topic, see Pot Stock Pitfalls To Watch For.)

The Bottom Line

Presumably, there exist people – whatever their number – who invest in the marijuana industry for the traditional reason: they’re looking to exploit undervalued assets and earn a healthy return. Others must derive some sort of psychic income from the idea of putting their money in taboo sectors of the economy. While they do so, their uptight neighbors are continuing to stay in such squaresville sectors as financial services and petrochemicals. Investopedia doesn’t offer investment advice, but we’ll leave it up to you to figure out which strategy has the more promising long-term potential right now.